A haart guide to negative equity
Negative equity means the value of your home is less than the amount you owe on your mortgage. Although it is not necessarily an issue, negative equity can become a problem if you are trying to remortgage or sell your home. This guide will answer your questions about negative equity, but if you have more don’t hesitate to reach out to your local haart branch.
What is negative equity?
Negative equity is when the current value of your home is less than the amount you owe on your mortgage. It can happen a few different ways, which we explore below.
How does negative equity happen?
There are three main causes of negative equity:
House prices falling and high LTVs
This is the most common cause of negative equity; if house prices fall significantly and if you borrowed with a high loan to value (LTV).
Negative equity is when the total borrowing secured against your home is greater than the property’s value. So, if for example, if your outstanding mortgage is £100,000 but your home is currently only worth £80,000, you'd be in £20,000 negative equity.
An interest-only mortgage is where you only pay the interest on your loan each month and not the capital. With an interest-only mortgage, the size of your debt stays the same throughout the mortgage term as you have only paid off the interest.
This type of mortgage puts you at a higher risk of negative equity if property prices fall.
Additional secured borrowing
If you have any other borrowing secured against your home, for example, a homeowner loan your LTV is again higher, putting you at greater risk of negative equity if property prices fall.
How do I find out if I am in negative equity?
If you bought the property with a small deposit, (the typical deposit is 15% of the property value), then you are more likely to have taken out a high LTV mortgage. Even if house prices fall by only a little bit, you are still more likely to be affected and at risk of negative equity.
However, knowledge is power, so finding out if you are in negative equity is the first step
To check if you are in negative equity:
- Find out how much your property is worth
- Check your mortgage balance
haart can offer you a free valuation of your property to help you find out its worth, but you can also use a property comparison website such as Zoopla or Rightmove to find out how much similar properties in your area are selling for.
Contact your mortgage provider and find out how much you still have left to pay. You can also do this by looking at your most recent mortgage statement. Then check the current value of your home and compare it to the amount outstanding on your mortgage.
Remember that house prices do fluctuate throughout the year. A mortgage is also a long-term financial commitment, so even if you are in negative equity, it may not affect your finances.
How do I protect myself against negative equity?
You cannot, of course, change the fluctuation of house prices. However, you can reduce your risk of being in negative equity:
- Keep your LTV low
- Save up a larger deposit
The lower your LTV the better, as it gives you a buffer against falling house prices. Mortgage lenders also tend to offer their best rates to borrowers with lower LTVs, so it’s also well worth saving for as large a deposit as you can.
How do I get out of negative equity?
If you are in negative equity, there are a number of steps you can take to get out of it:
Make mortgage overpayments
The aim is to lower your LTV. You can contact your lender to make larger monthly payments, or, if you have savings or investments, you could put some of this money towards your mortgage. Either way, overpaying will lower your LTV.
One thing to remember is to check your mortgage terms and conditions before you make a large overpayment, as sometimes there may be early repayment charges (ERCs) if you’re on a fixed rate.
If you don’t need to remortgage or move, you can simply stay put and wait for the housing market in your area to improve. The normal long-term trend is that house prices increase over time, which will eventually take you out of negative equity.
Improve your home
We have a guide to the ten best ways to add value to your home by making improvements. Of course, you need to work out how much the work will cost, and by how much it will inflate your home’s value, before deciding if the investment is worthwhile. There’s little point in spending a lot of money if it won’t help you in the long run, however some changes, like a fresh lick of paint or adding greenery won’t cost a lot and help you add value.
Can I remortgage with negative equity?
The short answer is yes, but it isn’t the easiest process. You will need to speak to your current provider to negotiate a deal that works for both parties as your current one comes to an end.
If they do not offer you a new deal, you will be moved onto their standard variable rate (SVR) when your current deal ends. This amount could be lower than your older repayments, but SVR deals can change at any time, which is risky if you are in negative equity or struggling with your finances.
If your mortgage payments do become unaffordable, speak to your lender about your options. You may be able to switch to an interest-only deal to make your repayments more affordable, but this isn’t always a long-term solution.
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If you’re looking to move, let us help you get it done quickly and with minimal stress. Find your local haart branch and get in touch to see how we can put our expert local knowledge to work for you.